Congo Wikis

Monday, April 15, 2013

WSJ: "Opportunities for illicit gain only increased after passage of DF-1502"

[UPDATED BELOW 4/19]
Some readers might remember that I set out a list of predictions regarding the impact of Dodd-Frank 1502 back in February 2012. I wrote then that while a single correct or incorrect prediction wouldn't prove or disprove my overall assessment of DF-1502, they would constitute a marker for future reference and a baseline of credibility. My third prediction was this:

3) The volume and value of the gold trade in e. Congo largely would be unaffected by DF-1502, because there's simply no viable way to control it.

Today the Wall Street Journal features a long piece, with reporting from Goma, Mumbai, New York and London, which says that the trade in gold was not only NOT affected by passage of the law, but that "opportunities for illicit gains only increased after the U.S. in 2010 passed a Wall Street overhaul, known as Dodd-Frank."

It's important to remember that the best estimates are that gold is and has been for a long time the most important and valuable of the minerals being artisanally mined in the Kivus. So the fact that the law has had only adverse impacts on the region's dynamics is hardly incidental.

It would also appear to contradict The Enough Project's repeated assertion that the legislation is "making it harder to profit violently and illegally from mineral smuggling."

The complete WSJ piece is available below the fold, for readers who aren't subscribers (or don't have free access to it via Starbucks, as I do.)

[UPDATE 4/19] I see Enough wrote a rebuttal contesting the Journal's reporting. They sidestep the central issue raised by the Journal: that gold is an internationally valued commodity traded in areas utterly unconcerned about conflict minerals and compact enough to make smuggling easy. Instead, they urge that more be done: "As the trade in conflict gold increases, now is the time for the Obama administration to have a major impact." I don't want to get into the details of their arguments--life is just too damn short--but consider this: A person can buy weed a mile from the White House, despite the hundreds of billions of dollars we as a nation have spent during our 30+ year "War on Drugs." But Enough's contention is that an SEC regulation will prevent Congolese warlords from trading gold with Indian, Lebanese or Chinese merchants in the most ungoverned regions of Central Africa. That doesn't seem terribly credible to me, but give them this: They will never lack for opportunities to declare that "Now is the time to do more."

Gold miners carry sacks of sediment from an abandoned industrial shaft at Makala Mine in the Ituri district of the Democratic Republic of Congo.

Reuters

Gold miners carry sacks of sediment from an abandoned industrial shaft at Makala Mine in the Ituri district of the Democratic Republic of Congo.

In the lakeside Central African city of Goma, four-wheel drive vehicles bump along a dusty road to get in and out of a compound surrounded by 12-foot walls and watched by an armed security guard. At a corner office inside, former tin trader Thiery Buzima busily fills orders for his new product: gold.

Mr. Buzima's thriving business represents an early link in a shadowy chain of smuggled gold that stretches from the conflict zones of the Democratic Republic of the Congo to the markets of Dubai and jewelry shops around the world.

Mr. Buzima buys gold from other traders and village miners who chip away at rocks along rivers and mountain slopes controlled by rebels in eastern Congo. His customers are primarily smugglers who hide the gold in vehicles that cross into neighboring countries, where it is recertified before heading to the Middle East and Asia in luggage accompanied by falsified documents, according to participants in this process.

The rise in smuggling has helped sustain Congo's violent insurgencies. But it also now threatens to taint the precious metal, much like so-called "blood diamonds" from Africa did at the turn of the 21st century.

Congo's yellow brick road

Along with many small-scale Congolese miners, men like Mr. Buzima turned to the new trade last year due to a combination of the high price of bullion and U.S. legislation that squeezed the legitimate market for Congolese metals. Besides, gold smuggling is more lucrative, providing margins as high as 30% on sales. "I keep getting new orders every week," says Mr. Buzima, flipping through paperwork on his office table. "It's a changing environment and we have to follow suit."

The World Gold Council also is adapting, and last year the mining trade group published guidelines for miners to keep conflict gold out of the supply chain. Other industry groups and international organizations have issued similar guidelines for refiners, jewelers and others. The efforts follow in the footsteps of the so-called Kimberley Process governing the diamond trade, which some have credited with helping to stem the flow of precious stones from conflict zones.

Gold smuggled out of Congo poses a challenge to the industry, and any links to armed conflict "undermine" the precious metal's image with consumers, says Terry Heymann, director of the responsible-gold project of the World Gold Council.

Gold's 12-year rally has lost steam—it officially entered a bear market Friday, closing at $1,501 per troy ounce—but that hasn't slowed the Congolese trade. The country is believed to hold tens of millions of gold ounces but has been plagued by decades of turmoil. Individual prospectors have exploited the gap, and total production has nearly quadrupled over the past half decade, hitting an estimated 26 metric tons in 2012, according to Thomson Reuters GFMS, which tracks the gold market. Much of that gold gets smuggled out of the country.

Justin Basimuka, a trader, walks as many as 25 miles to makeshift mines, paying rebels $60 a day to escort him along the jungle footpaths. At the mines he buys gold dust to carry back to Goma's middlemen. How much he makes depends on how often he gets shaken down by other rebels on his return. "Sometimes I can earn a double profit if the checkpoints are not many," Mr. Basimuka says.

The opportunities for illicit gains only increased after the U.S. in 2010 passed a Wall Street overhaul, known as Dodd-Frank, that requires U.S.-listed companies to disclose whether their products have been manufactured with any metals—including tantalum, tin, tungsten and gold—that may have been used to finance violence in the Democratic of Congo and its surrounding region.

Much of Congo's gold ends up in shantytowns near the Ugandan border. There, smugglers acquire falsified certificates indicating that the metal originates from either Uganda or South Sudan, according to human-rights researchers. Such certification can be obtained because the governments lack accurate estimates of small gold mines in those countries, according to Stephen Turyahikayo, a consultant who advises on mine certification in the region.

Peter Lokeris, Uganda's junior energy and minerals minister, said smuggling was the exception rather than the rule. He said Ugandan officials are under "strict instruction" to ensure only exports cleared by the Congolese government are allowed, "but you can't rule out some breaches."

Congo's weak central government has struggled to contain the violence among several militia and rebel groups, including one known as M23, who have partitioned gold-rich territories in the eastern part of the vast Central African nation.

Human-rights researchers say Congolese soldiers are also involved in smuggling, allegedly from areas near the Burundi border.

Augustin Ponyo Matata, Congo's prime minister, denied the involvement of Congolese troops in the illicit mineral trade and instead blamed M23. Amani Kabasha, a M23 spokesman, denied his group's involvement, saying much of the gold mining took place in areas it didn't control. "It's the responsibility of the state to ensure that there is no smuggling," he said.

The Enough Project, an advocacy group that has studied the gold trade, estimates that between 11 and 14 tons of gold were illegally smuggled from the Congo last year, up from four tons in 2010.

But the multinational smuggling racket is proving difficult to dismantle. Often the gold's faint paper trail disappears as soon as it arrives in Dubai, the business hub in the United Arab Emirates.

With fraudulent documents disguising its origin, up to 110 pounds of conflict gold can pass through customs as long as a licensed local dealer is listed on the accompanying paperwork, according to Ruben de Koning, a member of the U.N. group of experts on Congo.

"That's how the gold's trace is lost," he said. "It can go anywhere after the airport."

For most of the gold that makes its way through Dubai's arrivals hall, the destination is the same: the small refining shops attached to the local gold market, or "souk." The shops mix gold from different origins into scrap bars, which can be sold for cash to the souk's jewelers and traders. India, the world's largest consumer of gold, is a popular destination when it leaves Dubai.

Some of this gold is smuggled into India. Officials with India's Directorate of Revenue Intelligence say much of the smuggling into the country represents efforts to skirt higher import duties imposed last year. Gold smuggled into India isn't necessarily conflict-tainted.

Bachhraj Bamalwa, president of All India Gem and Jewelry Trade Federation, worries that the U.S. and European Union nations may ban imports of India's gem and jewelry if they suspect the country's retailers are trafficking in conflict gold.

In recent months, Customs officials have discovered smuggled gold inside television sets and false bottoms of baggage. In January, they caught a passenger arriving in Mumbai with gold bars worth 2.5 million rupees ($46,000) wrapped in chocolate packaging

About Me

David grew up in Ibadan, Abidjan, and Montreal. He is based in Kinshasa where he works on a public health project. He has published articles and essays on the Congo in the New York Times, the Washington Post, the Chicago Tribune, The New Republic, Dissent, and elsewhere.